What is an Investment Retirement Account?

Is an Investment Retirement Account a new retirement plan? If you are
new to Retirement Planning and, more specifically, Retirement Investment
Planning some concepts might be confusing. Let me try to clarify.

An Investment Retirement Account is a generic term for government and employer sponsored retirement plans.

In
the United States of America these plans include 401k retirement plans,
403b retirement plans, and 457 retirement plans - discussed elsewhere
on this Web site.

To add to the confusion the term Investment
Retirement Account is often, in the same context, called an Individual
Investment Account or an Individual Investment Arrangement or IRA.

These however, are specific retirement plans in the United States of America.

Let's use IRA as the generic term for this discussion.

The four pillars of an IRA are:

Regular saving

Compound interest

Tax free income

Tax deferred growth

Regular saving

People
– you and I – simply do not, or did not, put a priority on regular
saving when young. An IRA demands regular saving however small it is.

Compound Interest

The
power of compound interest is exponential. You receive interest every
month on your total savings as well as on your total previously earned
interest! The longer the compounding period the more spectacular the
results.

Tax free income

You don't pay tax – up
to a limit set by government – on the amount you regularly save. Often
your employer will match your savings amount with an equal contribution
which is effectively free money, tax free. This really accelerates the
compounding interest effect.

Tax deferred growth

Typically your money is allowed to grow tax free in an IRA. You only pay tax when you withdraw funds from your account.

Which plan to choose?

The debate around a tax advantaged IRA plan – the pros and cons of one plan against the other – seem to me to be irrelevant!

Let
me say immediately that these plans would work wonderfully for a young
person who starts early in his or her working life to make regular
contributions to an IRA.

But in my experience very few youngsters
take retirement provision seriously in their early working days. It is
only when you get within 15 years of retirement that you get really
serious. That happened to me too.

At that time the tax advantaged
investment plans are not going to add up enough in your retirement
account. You need to start saving substantially more than governments
allow as a tax advantage.

You need to save more of your taxed income.

You need to curb excessive consumption.

You need to explore the possibilities of multiple income streams.

It
is at this stage that you are prone to schemes that are too good to be
true. Don't invest in such schemes. Stay with a diversified and
conservative spread of your IRA.